The fiscal response to the health crisis has been swift, substantial and multi-pronged. Emergency measures, seeking to cushion the recessive shock and facilitate economic recovery, have been joined by recovery packages that support the ongoing upturn and pave the way for future growth. There are, however, disparities between countries as to the sums involved and the distribution of the measures. On our analysis, Italy has made the biggest effort, with a total running at 71% of GDP. It is followed by Germany, with 47%, Spain, with 31%, and France with 26%. As a percentage of GDP, Germany, France and Italy have made greater use of liquidity measures and guarantees, whilst Spain has focused on fiscal measures
The economic shock caused by the Covid-19 pandemic has resulted in a sharp increase in banks’ cost of risk. This has been particularly steep for the Spanish, Italian and Portuguese banking systems, which are notably oriented towards retail banking and have relatively high levels of exposure to the sectors most affected by the pandemic. Moreover, the effects of the sanitary crisis on the cost of risk have been exacerbated by the forward-looking approach of the IFRS 9 impairment model for financial instruments, which has been in force since 1 January 2018. Under this accounting standard, it is not the defaults themselves that give rise to the recording of provisions for impairment, but the mere expectations of such defaults
Growth in Central Europe looks set to accelerate in the 2nd quarter of 2021, after already a good performance in the 2nd half of 2020, as indicated by the capacity utilisation rate in the manufacturing sector. This highlights good resilience despite a shortage of chips in the automotive sector and a fairly severe 3rd wave of Covid in the 1st quarter of 2021. Improving business conditions in the industrial sector stem from the on-going recovery in demand, specifically for exports: this has already allowed economic activity in the Czech Republic and Slovakia to move above pre-Covid levels, whilst the Polish and Romanian economies have returned to around pre-crisis levels. This performance should allow the region’s GDP to recover its pre-Covid levels before the end of 2021 (growth of 4
Limiting global warming will require huge investments, which will partly have to come from the public sector. This could lead to a crowding-out effect. Higher public borrowing requirements could push up interest rates and weigh on private investments. In the near-term such a risk seems remote. On the contrary, there could be a crowding-in effect with a reduction in climate-related risk and positive second-round effects from green public investments stimulating private investments. To reduce the risk that financial markets would exclusively focus on the impact on public indebtedness, governments should communicate clearly on the nature of their investments, insisting that they should have a return which is a multiple of the borrowing cost.
In the northern European countries, the economic impact of the Covid-19 crisis in 2020 was one of the mildest in the European Union, with GDP contracting only about 3% in Sweden, Denmark and Finland, compared to a Eurozone average of more than 6%. To what extent has this enabled the economic agents of the Nordic countries to have greater confidence than their European neighbours? According to the latest European Commission surveys, the economic sentiment index picked up strongly in March 2021, a trend that can be seen in most of the European countries
Looking beyond the short-term economic shock, the Covid-19 pandemic and the exceptional health protection measures introduced to contain the virus raise many questions as to the lasting consequences of the crisis. The issue of zombie firms, which is far from new, has taken on a whole new dimension, as their weight in developed economies has progressively increased since the 1980s. Massive public interventions to tackle the effects of the pandemic, whether by governments – debt moratoriums, cancellations of employer social security contributions, widespread use of short-time working schemes, etc. – or by central banks – increase and prolongation of asset purchases schemes – could result in keeping non-viable companies afloat, raising fears of a zombification of economies.
The latest Google Mobility Report - published on 6 December – shows that customer traffic flows to retail and leisure businesses in Europe early this month continued to build on the momentum reported end November. This momentum is the result of the easing of containment measures in Europe...
Due to the lengthening of the health crisis, the European Banking Authority decided on 2 December 2020 to reactivate its guidelines on legislative and non-legislative moratoria on loan repayments. This decision aims at easing credit instructions criteria for granting moratoria. Moratoria granted in relation to the COVID-19 pandemic before 31 March 2021 will not automatically be considered as a forbearance measure. However, such moratoria must have benefitted a sufficiently large set of borrowers and their granting must have been based on a criterion other than solvency. The beneficiaries of moratoria that aim at preventing a default will no longer automatically be considered in default
Spain, Greece, Italy and Portugal have been hit hard economically by the Covid-19 epidemic. These countries have also suffered for many years from sluggish potential growth, which is among the lowest in Europe. The main obstacles are more or less the same: a low level of investment and productivity, and a slowing - or even declining - demographics which weigh on the workforce. How have these different factors evolved? What may be the impact of the current economic crisis on structural growth? Which levers to operate?
CaixaBank and Bankia, respectively the third and fourth largest Spanish banking groups in terms of CET1, formalized on September 3, 2020, the opening of negotiations for a potential merger. If it materialized, this operation would consolidate the Spanish banking system. The level of concentration of the latter is comparable to that observed on average in the euro area, following two successive waves of consolidation between 2008-2009 and 2012-2013 from which CaixaBank and Bankia themselves emerged. The question is whether or not this could be the prelude to a broader movement of concentration that the ECB has been in favour of since several years. Indeed, the banking supervisor sees consolidation as a way to improve the financial profitability and resilience of banks1
While Europe has been hit hard by the Covid-19 pandemic, Nordic countries have been relatively less affected – with the exception of Sweden, where restriction measures have been particularly soft. As a result, Nordic economies have been among the most resilient in Europe. In the second quarter, GDP fell by “only” 8.3% in Sweden, 6.9% in Denmark, 5.1% in Norway, and 4.5% in Finland. That compares with drops of 9.8% in Germany, 13.8% in France, and nearly 12% in the euro area as a whole. That said, businesses and consumers in Nordic countries are not especially optimistic about the economic outlook, which certainly reflects the region’s reliance on global trade
Through the Recovery and Resilience Facility, an essential part of its Next Generation EU plan, the European Union (EU) will disburse grants and loans to member states according to precise criteria. Allocations for 2021 and 2022 will depend on each country’s population, GDP per capita, and unemployment rate. The same criteria will be used for 2023, except for the unemployment rate, which will be replaced by the loss in real GDP observed this year and the cumulative loss observed over the period 2020-2021. With that in mind, the think tank Bruegel has estimated the allocations by country[1]
The analysis of banks' business model responds to strategic as well as regulatory needs. It can also contribute to studying the effects of monetary policy, amongst other things. However, no harmonized definition exists in the literature. The authors therefore regularly use hierarchical cluster analysis to objectively classify banks according to their business model. These empirical, algorithm-based approaches rely heavily on balance sheet variables. Still, the distribution of bank sources of income and assets under management are also relevant variables. We therefore perform our own classification of European banks according to their business model using all these variables
The Covid-19 shock has triggered a significant fiscal policy response by European Union member states. Even though it is likely to be short-lived, the 2020 recession will be historic. The fiscal response has therefore been essential in avoiding much more serious and longer-lasting economic consequences. Member states have not all been affected in the same way by the current crisis, and the scale of their fiscal responses varies. The European response has been one of the few positive aspects of the crisis. However, the challenges are not yet over. Levels of risk and uncertainty on both the public health and economic fronts will remain particularly high over the next few months
Corporate sentiment has jumped following the easing of Covid-19 related restrictions. There is a risk of excessive enthusiasm because better business expectations do not tell us where we are in terms of the level of activity and demand. The current phase of the rebound is mechanical. It shows that the supply side starts to function again. The real question however is what happens to the demand side in the coming quarters. Companies and households are confronted with limited visibility, so caution will prevail.
Recent economic data have improved on the back of the easing of lockdowns. This may create a feeling of false comfort. The effects of the severity of the crisis will make themselves felt well into the future. A key factor is the rise in unemployment and in unemployment expectations. Both weigh on household spending, due to related income losses and increased precautionary savings. The major national central banks of the Eurosystem expect unemployment to increase in 2021, despite the economic recovery. When visibility remains limited and the pressure on profits high, many companies have no other option than to reduce their labour force
One of the longer-lasting consequences of this crisis is a forced increase in corporate gearing A high level of corporate leverage can act as a drag on growth. Research shows that firms with higher leverage invest less than others. This reduces the effectiveness of monetary accommodation. Highly indebted companies may also suffer a lasting loss in competitiveness vis-à-vis their better capitalised competitors. It implies that policies aimed at recapitalising companies should have lasting favourable effects on growth.
The European Commission is proposing a comprehensive plan to support growth and achieve the EU ambitions in terms of climate policy and digital strategy. Such an effort is necessary in order to avoid that the current crisis would increase the economic divergence between member states. Such a development would weaken the functioning of the Single Market and weigh on long-term growth. The Commission proposes a combination of grants and loans at favourable terms, funded by debt issued directly by the EU. Given the resistance of certain countries to grants, negotiations on the proposal will be tough.
In the coming decades, the European countries will be confronted with rising costs related to population ageing. Based on very optimistic assumptions, simulations carried out by the EU’s Economic Policy Committee suggest that these costs are manageable. Persons that enter the workforce now are unlikely to retire under the same conditions as those who retire at the moment. The transition to leaner public pension schemes calls for accompanying measures such as incentives to remain longer in the labour force and inducements to better prepare retirement. In particular, the authorities could inform employees regularly about their pension rights and encourage them to increase their retirement savings.
Clear progress has been made at the European Council meeting this week. The proposals of the recent Eurogroup meeting on the creation of three safety nets have been endorsed. There is agreement to work on a recovery fund intended for the most affected sectors and geographical areas in Europe. Its financing would be linked with the multiannual financial framework. Importantly, Chancellor Merkel has declared that, in the spirit of solidarity, one should be prepared to temporarily pay a higher contribution to the European budget.
